California Appeals Court Reinstates Challenge to Allegedly Deceptive ARMs

Mortgage Origination

On October 11, the California Court of Appeal, Sixth District, reinstated a case in which borrowers claim fraudulent omission and violation of the unfair competition law (UCL) based on lenders' alleged failure to disclose the essential terms of certain mortgage loans. Thibault v. Am. Mortg. Network, Inc., No. H036620, 2012 WL 4881541 (Cal. Ct. App. Oct. 11, 2012). The borrowers claim the lenders did not disclose that the option adjustable rate mortgage loans (ARMs) were guaranteed to cause negative amortization under the minimum payments required under the loans, as set forth in the only payment plan presented to the borrowers. The trial court dismissed the case, holding that the ARMs at issue do not necessarily cause negative amortization as the loan documents clearly disclose that negative amortization occurs only if the minimum payment fails to cover the interest due, and the borrowers chose not to make more than the minimum payment. The appellate court, relying on a prior California appellate decision, Boschma v. Home Loan Ctr., Inc., 198 Cal. App. 4th 230 (2011), disagreed and held that the borrowers adequately pleaded that material facts were concealed by inaccurate representations and half-truths; the court reasoned that the actual interest rates and monthly payment amounts necessary to amortize the loan were hidden in the complexity of the loan terms. The court further noted that the loans disclosed the use of "teaser" interest rates to calculate the minimum payments without showing how those payments compare to the interest accruing on the loan. With regard to the borrowers' potentially duplicative UCL claim, the court found no reason to force the borrowers to choose between that claim and their common law fraud claim at this stage of the proceedings. The appellate court reversed the trial court's judgment.